Speech by SEC Commissioner:
Remarks before the International Organization of Securities Commissions' Roundtable on the Quality of Public Company Audits

by

Commissioner Roel C. Campos

U.S. Securities and Exchange Commission

Paris, France
June 1, 2007

Good Morning. Bonjour.

It is a great pleasure and a distinct honor to be here with you today. I am before you today in my capacity as the Vice Chair of the IOSCO Technical Committee and, in particular, I have the great privilege of being chair of a very important task force on behalf of my colleagues on the IOSCO Technical Committee — the Task Force on Audit Services. Along with Michel Prada, I wish to welcome all of you. We have the distinct pleasure today of hosting many of the most senior executives from the major global audit firms today. Thank you for your interest. We also have a good many academics, institutional investors, and, of course, the major part of our audience is the group of securities and banking regulators from around the world. It is the regulators today who wish to explore the issues of audit quality and concentration. I think you will find your time well spent today.

I want to convey a special thanks to Michel Prada and to Sophie Baranger and their excellent team at the AMF for hosting this important event and doing many of the difficult logistics to bring this project together. I also wish to thank members of my own U.S. SEC staff who worked tirelessly to help prepare this event: Susan Koski-Grafer, Len Jui, Estee Levine, Troy Beatty, and Mark Barton.

So, why are we here today? As most of you realize, the International Organization of Securities Commissions (IOSCO), is comprised of the securities regulators of the world. Of course, many of our members, as consolidated regulators, also regulate other parts of the financial services industry in their home countries. The Technical Committee of IOSCO is concerned about the global state of financial reporting. Certainly, the reduction of global firms to four following the demise of the audit firm of Arthur Andersen adds to our concern. While other groups and even regulators like the FRC in the UK have done considerable work in this area, we believe that no organized study of the issues of audit services has been conducted from the unique perspectives of the regulator and investor. Accordingly, today's conference is the first of perhaps several conferences and roundtables to study in depth the best ideas for necessary improvements of financial and audit services.

Consider that the audit industry has evolved principally from the decisions of the governments of the United States and, thereafter, other countries, in the wake of the great stock market crash of 1929. The basic requirement that audited financial statements be filed by public companies is still the fundamental underpinning for the manner in which the audit industry operates today. Consider also that after the Crash the governments of the United States and other countries seriously considered going a completely different way. Instead of requiring an audit from an independent audit firm, serious thought was given to establishing a large group of government auditors who would review and opine on the financial statements of public companies. So to a great extent, the modern audit profession owes its existence to fundamental decisions made by governments, whose rules were developed and implemented by regulators. So it seems rather appropriate that regulators look at what they have wrought — 75 years after these fundamental decisions were made.

At its most basic level, should regulators continue to support through rules and regulation the current model for offering financial services? Would there be a market solution, for example, if regulators removed the requirement for audited financials? Some argue that issuers, to maintain investor interest in their stock, would provide audited statements without a regulatory requirement.

It is impossible to provide a full and comprehensive list of issues that our study might explore. A brief mention of a few issues will provide the flavor of what we may encounter: What is the impact of the global economy and the needs of global companies? Do the costs of audits have to be so high and in particular what is the impact of high audit fees on smaller issuers. Do audited financials statements provide or produce the necessary level of confidence for investors to make investment decisions? How does one measure quality in financial reporting? Indeed, what are the specific needs from financial statements that investors need and want? Is there enough choice for issuers among audit firms? Should regulators take some action to encourage further entry into the audit of public companies? Should regulators consider liability caps and other protections?

So we will look at these issues through the prism of regulators and of investors. Let me explain the concern of regulators with a short story.

Fresh out of business school, a young man answered a want ad for an accountant position in Paris. He was being interviewed by a very nervous man who ran a small business that he had started himself.

"I need," he said, "Someone with an accounting degree, but mainly, I'm looking for someone to do my worrying for me."

"Excuse me?" the accountant said. "I worry about a lot of things," the man said. "But I don't want to have to worry about money. Your job will be to take all the money worries off my back."

"I see," said the accountant. "And how much does the job pay?"

"I'll start you off at 250,000 Euros."

"250,000 Euros!" the accountant exclaimed. "How can such a small business afford a sum like that?"

"That," said the owner, "is your first worry."

So, somewhat like this Parisian owner, the regulators also do not want to have to worry.

Now let me explain few logistics for today. The First panel is entitled "Audit Quality," which will be moderated by me. It will be followed by a short break.

The second panel is entitled "Impacts of Auditor Liability on Behavior and Quality," which will be moderated by Jeff Lucy of ASIC. That panel will then be followed by lunch. Lunch will be in a cocktail format, with no sit-down table, in which there will be different stations for food and participants will have the opportunity to mingle and network. After lunch, the third panel will be entitled "Audit Firm Concentration," and moderated by Michel Prada of the AMF. We will then have a short break and finish with a Concluding Panel, moderated by me.

After each panel, we will leave about 20–30 minutes for questions from the audience — we expect good questions with the high professional attendance. There will be forms passed around for written questions.

The conference will be filmed and made available in a few weeks on the IOSCO website. We also will prepare summary books that will be made available to all the participants after the event.

As stated earlier, we intend to study carefully the points made today and to consult seriously with industry and academia and investors, discussing suggestions that are made today. There may be other round tables to discuss specific suggestions. Ultimately, this task force will prepare a paper of conclusions and observations for regulators and investors, which may lead to adoption of broad principles or perhaps recommended practices.